Republican Tax Reform Plan Falls Far Short of Reagan Principles

Americans elected President Donald Trump and Republicans majorities in both houses of Congress to enact a bold tax reform plan including a massive Reaganesque across-the-board tax cut to spur economic growth. The politicians in Washington D.C. didn’t get the message, and the tax reform debate has led to a Tax Cuts and Jobs Act that falls far short of Reagan principles.

The first error is in crafting a tax reform bill that is “revenue neutral,” which means it will neither cut taxes significantly nor create many new jobs. It is only through large reductions in the marginal tax rate that increased investment and job creation occurs that actually increase revenues. Republicans have also mixed in a dose of class warfare to the plan, an idea more likely to come from European socialists. Offering far less than they promised in the campaigns of last Fall, Republicans have limited the tax cuts to merely $1.5 trillion over the next ten years.

The Republican plan offers meager tax cut of $150 billion per year to keep the plan revenue neutral. Many middle-class Americans will pay higher taxes under this tax reform, that is supposedly tax cut plan, because they will be paying for someone elses tax cut. The concept of a “revenue neutral” tax plan is entirely inconsistent with enacting pro-growth across-the-board tax cuts.

As a candidate, Trump proposed a giant across-the-board tax cut, that according to the Tax Foundation, would have cut as much as $5.9 trillion in taxes over the next ten years. Instead, Republicans in Washington D.C. have come up with a moderate plan, lacking in vision, that will do little to foster economic prosperity. For millions of Americans, the “Tax Cuts and Jobs Act” will seem more like the Tax Hikes and No Jobs Act.

Republicans had been strong advocates of the core principles of free markets, low taxes, and limited government. President Reagan stood for massive tax cuts for all, against some in his own party as well as opposition from most Democrats. But by standing strong for these principles and working hard for Congressional passage of his plan, Reagan enacted policies that led to the largest economic expansion since World War II. In stark contrast to that, the current Republican leadership in Congress seems more oriented toward class warfare, progressive taxation, and the notion of enacting “revenue neutral” tax reform.

For example, one of the class warfare provisions of the plan could easily have been drafted by the likes of Democratic Leader Nancy Pelosi (D-CA) rather than Speaker Paul Ryan (R-WI). The provision found in Sec. 3801 of the bill that targets “nonqualified deferred compensation,” will render useless some deferred compensation plans by imposing taxes on employees of American companies that provide such plans. The provisions taxes these plans when they “vest” rather than when they pay out. It is sad that Republicans are trying to kill deferred compensation, when you would expect this to come from the far left of the Democratic party. Sadly, had this come as an amendment from the Democrats to the tax bill, that would have failed with no support from Republicans, yet Republicans are the ones pushing this anti-growth idea that will hurt entrepreneurs and medium sized companies trying to retain good talent.

Republicans are straying from their own principles. The most recently adopted platform of the GOP states, “We oppose tax policies that deliberately divide Americans or promote class warfare.” As a candidate for President, Donald Trump strongly voiced Republican principles in promising that “Everybody is getting a tax cut, especially the middle class.” So why are Republicans pushing policies that are hostile to competitiveness and hinder economic growth rather than those that lead to more jobs and prosperity?

Opposition to the Republican tax reform by the National Association of Home Builders (NAHB), National Association of Realtors (NAR), and the National Federation of Independent Businesses (NFIB) shows the problem with enacting a plan that targets many industries for tax hikes. The plan cuts in half the mortgage deduction and targets small businesses with tax increases in order to ensure the total taxes cut by the plan do not exceed the caps of $1.5 trillion.

If the goal is to reform the tax code in a way that fosters economic growth and job creation, the notion of enacting a plan that is “revenue neutral” need to be rejected first. Pro-growth tax cuts are paid for by the increased revenue they create by fostering economic growth, not by raising taxes in other areas to “pay” for the meager tax cuts Republicans are willing to enact. From the goal of enacting a bold tax reform that would cut everyone’s taxes, the plan from Republicans ends up a weak and watered-down moderate bill that offers few reasons for its passage. Republicans in Congress should ditch this plan and pass one much closer to what they campaigned for last Fall.